Effective Interest Rate (EIR)
What is EIR (Effective Interest Rate)?
The effective interest rate (EIR) is the true yearly cost of a loan, taking into account how interest is calculated and how often you repay. It can be higher than the advertised rate, especially for flat-rate loans. For home loans charged on monthly rest, the EIR equals the advertised rate, which makes EIR the fairest way to compare packages.
Key facts
- What it shows
- The true cost of borrowing, as a yearly rate
- Monthly rest loans
- Interest on the outstanding balance; the EIR equals the advertised rate
- Flat-rate loans
- Interest on the original amount throughout; the EIR is higher than the advertised rate
- Repayment frequency
- Repaying in instalments raises the EIR of a flat-rate loan
- Use it to
- Compare loan packages and refinancing offers
As of 6 Nov 2026. Source: MoneySense.
How EIR works
Two loans with the same advertised rate can cost very different amounts, depending on how interest is calculated:
| Method | Interest charged on | EIR compared with advertised rate |
|---|---|---|
| Monthly rest | The outstanding balance, which falls as you repay | The same |
| Flat rate | The original loan amount, for the whole term | Higher |
Example
MoneySense’s example: you borrow $1,000 and pay $200 in interest over one year.
| How you repay | Effective interest rate |
|---|---|
| One payment of $1,200 at the end of the year | 20.0% |
| Twelve monthly payments of $100 | 41.3% |
The interest is the same $200, but in the second case you are repaying the money gradually while still paying interest as if you owed the full $1,000, so the true cost almost doubles.
Common mistakes
- Comparing headline rates only. A low first-year rate can hide higher rates later. Compare the rate for each year of the package.
- Treating flat and monthly-rest rates as equal. A flat rate of 2.5% costs more than a monthly-rest rate of 2.5%.
- Ignoring fees. Penalties, clawbacks and legal fees add to the cost of switching, on top of the interest.
Frequently asked questions
Why do advertised rates and EIR differ?
On a flat-rate loan, interest is charged on the original loan amount for the whole term, even as you repay. You pay interest on money you no longer owe, so the true cost is higher than the advertised rate.
How do I know whether my loan is flat-rate or monthly rest?
Ask the bank and check the loan documents. If interest is charged on monthly rest, based on the outstanding balance, the EIR equals the advertised rate. MoneySense's flat-rate examples are car loans.
Should I compare home loans by EIR?
Yes. MoneySense suggests comparing repayment schedules, advertised rates and the EIR when you look at repricing or refinancing options.
Related terms
Sources
- Costs of borrowing: flat rate, monthly rest and effective interest rate (MoneySense)
- How home loans work (MoneySense)
Every figure on this page was checked against the official government sources above on 6 Nov 2026. See our editorial policy.
This is general information, not financial, legal or tax advice.